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Finance Minister Pranab Mukherjee’s bold gamble of letting the fiscal deficit slip out of his hands may still have paid off had he articulated a vision for economic reforms in the debut Budget of the United Progressive Alliance II (UPA II) government. A further fiscal stimulus of Rs 40,000 crore, through additional Plan expenditure for rural infrastructure, has pushed the gross fiscal deficit of the Centre (6.8 per cent of GDP) and states (4 per cent of GDP) to double digit levels for 2009-10, a throwback to the early 1990s.

Deep deficit, shallow response make hope, market sink

The unambiguous mandate that the Congress-led UPA received in the general elections had re-ignited expectations of systematic reforms over the next five years. Mukherjee did not manage expectations well and missed an opportunity to showcase UPA II’s commitment to bold actions on several fronts — be it disinvestment, labour flexibility, targeted subsidies or structural tax reforms.

Pranab BUDGET is an EXCELLENT Sample of Rulin Hegemony Mind Control and Magic Economics! Lalu masteredthe art with his rustic HUMOUR. But the ELITE Brahmin from Bengal justified in moreways how he happens to be the AXIS of the MANUSMRITI ZIONIST APARTHEID COLONIASTATE POWER!

Rural iNDIA IS THE GREATEST MARKET ON THISEARTH!PRANAB OPENED THE CLOSED SHUTTERS WITH HIS DAMNED FLAGSHIP PRGRMME AND COMMON MINIMUM PROGRAMME OF MASS DESTRUCTION. RAILWAY ROAD NETWORK AND THE BLOODY INFRASTRUCTURE HAVE TO BE ERECTED ON OUR RIBS AND BONE. UNIQUE I CARDS WILL EJECT US OUT OF THE COUNTRY AND NRIS WOULD ENJOY THE AMERICANISED INDIAN CITIZENSHIP.

Who will be getting those One Lac EIGHTY SIX Thousand Corore allocated for RECESSION?

India INCs and DESI Illuminati Screamin hard for ECONOMIC Reforms and DISINVESTMENT which NEVER cares for Direct Indirect Taxation as they always afford to pay anything including TAXFRREE DONATION to all Hypocrite Political parties and IDEOLOGIES! They want our BLOOD. The MEAT of the Black Untouchables to get all the RESOURCES on the EARTH, Under the SEA and into infinite SPACE. Thus, they REMAIN GLOBAL CITIZENS out of INDIAN Law and Order Jurisdiction. They do INCLINE to KILL our Parliamnet, Democracy, Society, Demography, Landscape and Human Scape, Production Systems, Livelihood and HOMES and the ELECTED EUNUNCHS OBLIGE with garatitude!

DEFENCE EXPENDITURE is HIKED 34 percent with FDI and DISINVESTMENIMPUT Uncontrolled! WHO will be the FODDER? Who will have the SWISS BANK accounts!

India is readying to launch Chandrayaan 2 in 2013. This means merely four years from now the nation will have a rover softland on the moon. It will be a great achievement for the Indian nation!

India confirmed on Monday a defence budget of Rs 1.42 trillion – a 34 percent increase from last year, as announced in February’s interim budget – with the submission of the general budget for 2009-10 in parliament.

Indian Finance Minister Pranab Mukherjee tabled the first budget of the new government with the focus on development and expenditures in line with pre-poll commitments.

Budget estimates provided a total expenditure of Rs 10.2 trillion, with the fiscal deficit projected at 6.8 percent of the gross domestic product.

In the defence budget, a huge sum of Rs 548.24 billion has been allocated to capital outlay to procure state-of-the-art armaments. Moreover, in line with a long-standing demand by defence officials, the finance minister also announced a substantial increase in pensions for ex-servicemen.

Significantly, the External Affairs Ministry’s allocations have been slashed from Rs 68.68 billion to Rs 62.93 billion. However, its discretionary expenditure has been almost doubled from Rs 6.15 billion to Rs 11.78 billion.

Mukherjee also proposed Rs 4.3 billion to upgrade the police force. The minister also sanctioned Rs 22.84 billion to improve management along international borders.

India is also planning to send astronauts in space by 2015. And India is prepared to shell out as much as 2.5 billion dollaar on its space odyssey.

The Indian Planning Commission has reportedly signed off a $2.5 billion plan to follow an unmanned orbiter in 2013 with a manned mission in 2014-2015. This is actually slightly less ambitious than some of the rumours that were circulating when Chandrayaan launched, which had India putting people on the Moon by 2015.

The London Times sometimes ago said that although the Indian Cabinet still has to sign off the plan this is a formality now the commission has approved it.

While the merits of manned space programmes can – and will – be debated till everyone is blue in the face, it’s nice to see some new players on the space scene. After all, there’s space for everyone up there (so long as you’re careful).

India has earmarked Rs 12,400 Crore for its manned space mission that it wants to launch in 2015. India’s Planning Commission made the announcement a few months ago.

In the meantime India's second lunar mission Chandrayaan-II is likely to be launched by 2013, Indian Space Research Organisation (ISRO) chairman G. Madhavan Nair said on Saturday.

"Chandrayaan-II should take place by 2013. Our first lunar mission, Chandrayaan-I, has given us a substantial understanding about entering the moon's orbit. But ensuring the safe landing of the rover on the lunar surface is still an obstacle," Nair told reporters on the sidelines of a ceremony in New Delhi.

Ranbir encounter: Murder case registered against cops

A case of murder has been registered against the police officials involved in the alleged fake encounter of Ranbir Singh in Dehradun.

An FIR has also been registered against two DSPs Ajay Kumar and G C Tamta on the basis of a complaint of Ranbir's father Rabindra Pal Singh.

The 22-year-old MBA graduate was gunned down by police on last Friday. His autopsy report revealed that he was shot at close range and may have been tortured.

Meanwhile, Uttarakhand CM Dr Ramesh Pokhariyal Nishank has stated that he is ready to order a probe by the Central Bureau of Investigation (CBI) into the case pertaining to the police encounter of Ranbir Singh if his parents so want.

Indicating that he might order such a probe, Nishank told media, "We want to proceed in this matter in a transparent manner and hence what matters most is that parents of the victim must be satisfied. I have complete confidence in the high level probe ordered into the matter but I will not hesitate to order a probe by any other agency if they want so."

Manmohan, Obama likely to meet at G-8: Menon

Prime Minister Manmohan Singh is likely to meet US President Barack Obama on the sidelines of the G-8 summit in Italy, Foreign Secretary Shivshankar Menon indicated on Monday. He also confirmed the possibility of meeting with his Pakistani counterpart Salman Bashir on the sidelines of the NAM summit in mid-July.

When asked about PM-Obama meeting, Menon said, “I am sure they will be meeting, but we will tell you once we have it all sorted out, (with) precise timings and places.”

On the meeting between him and the Pak Foreign secretary, he said, “It is likely to take place at Sharm-al-Sheikh (in Egypt) because I think this will be the first location where we will get a chance to meet.”

On the substance of that meeting, he said, “ We will do what we have been asked to do by our leaders. Pakistan will tell us what they have done, we will tell them our concerns and we will then report to our leaders about where we stand on the issues, which for us is bringing the perpetrators of terrorism against India to justice and dismantling the infrastructure of terrorism in Pakistan, which supports these activities.”

'Union Budget is sour, trepid and unimpressive'

New Delhi:

Samajwadi Party, which is extending support to the government, on Monday joined the opposition in ridiculing the General Budget, terming it as "sour", "trepid" and "unimpressive".

RJD chief Lalu Prasad, who had criticised the Rail Budget two days back despite his association with the ruling UPA, however, struck a conciliatory tone and described the Union budget as a "balanced" one.

SP, BJP, Left parties, JD(S) and BJD were critical of the budget even as the Congress hailed it.

"While the Rail Budget was sweet and sour, this budget is only sour," SP chief Mulayam Singh Yadav said while reacting to the Budget presented by Finance Minister Pranab Mukherjee in Parliament.

He particularly said farmers and rural areas have been neglected in the budget.

"I do not see any great message in the budget. It is timid, trepid and unimpressive," senior BJP leader and former Finance Minister Yashwant Sinha said.

that they hoped for. Individuals in the low-to-middle-income groups will save at least Rs 1,030 in tax, benefitting from the Rs 10,000 increase in the income tax exemption limit. Senior citizens will pay at least Rs 1,545 less. The filing of tax returns is also set to become simpler, particularly for the salaried, as the government plans to re-introduce ‘Saral’ forms.

But it is those with taxable income of over Rs 10 lakh that have gained more from the Budget. They benefit from the removal of the 10% income tax surcharge as well as the higher exemption level. As a result, their tax incidence at the highest slab has declined to 30.09%, from 33.99%. This is the first time in many years that the high-income group, the group that drives consumption of the mid-market to premium consumer goods and services, has got any concession from the government. It is meant to be a small step in the direction of reforming the tax structure to make it simpler.

However, a part of what this group has gained can be taken away by the government’s proposal to scrap fringe benefit tax (FBT) on employee perks and shift the burden to employees. As a result, employees would be taxed for contributions made to the superannuation fund.

Likewise, stock options would become taxable on the date of vesting. In both, individuals would pay taxes on benefits they have not received: the superannuation fund is received by an individual only on retirement while the benefits of a stock option can be enjoyed only when the stocks are sold.

The new form of taxation of the superannuation fund creates a situation where contributions as well as withdrawals are subject to tax. This goes against the accepted principle of taxing such savings only once, observed Kaushik Mukherjee, executive director, tax and regulatory practices, PricewaterhouseCoopers.

For those getting stock options, the person who sells the stock at lower than the vesting price, at least in theory, would have suffered a higher than warranted tax. “Ideally, the tax should become payable when the stock is sold,” said Vikas Vasal, executive director, tax, KPMG. That was the norm before former finance minister P Chidambaram introduced FBT.

Conversely, the change in taxation of stock options will enable expatriate employees to claim credit in their home country for taxes paid in India. In any case, the government needs to provide more clarity on the taxation of perks now that FBT is being scrapped.

The government’s plan to expand the scope of presumptive tax to all small businesses a with turnover up to Rs 40 lakh will ease the burden of maintaining books of accounts and ease their funds flow. This section of business can, from the next fiscal, pay 8% tax on their turnover at the end of the year instead of an advance tax. The measure may increase compliance as well as the tax base.

In the past, such measures have yielded results and there is no reason to doubt that more businessmen will not come forward to file self assessment.

The re-introduction of Saral forms, replacing the ITR forms, will also remove confusion tax payers face at the time of filing returns. At present, individuals are required to pick one of the four ITR forms, depend-ing on his sources of income to file income tax returns

New protests have flared in Urumqi, two days after 156 people died and 800 were injured in the western Chinese city. At least 200 Uighurs faced off against police in Urumqi on Tuesday following news that 1434 people were arrested in connection with ...

US President Barack Obama is having his first meeting with Russian Prime Minister Vladimir Putin. Mr Obama's meeting with the man widely regarded as the most powerful in Russia is taking place on the second day of the American leader's visit to Moscow.

India's 'left of centre' budget

Analysts say the government wants to spend its way out of the recession

Paranjoy Guha Thakurta says the "pro-poor" 2009 budget represents a discernible shift to the left by India's Congress party following its election win in May.

Budgets in India are much more than statements of financial accounts. They are important pronouncements on the political economy of one of the world's fastest growing countries.

Monday's budget presented by 73-year-old Finance Minister Pranab Mukherjee was no different as he sought to confront major challenges in reviving India's sagging economy.

It is, not surprisingly, a continuation of the Congress party-led government's left-of-centre, pro-poor and populist policies.

There will be a sharp rise in deficit financing to pay for welfare schemes such as the landmark jobs-for-work programme - which has seen a near 150% rise - in the villages and social security schemes for unorganised workers.

Modest sops

So the bulk of the money to fund all this will come from printing currency and borrowing from India's central bank. There is also an implicit assumption that some money - nearly $10bn - will be raised by auctioning electromagnetic spectrum for telecommunications and divesting minority government holdings in state-run companies.

There are a few sops for the middle class though. Modest relief has been given to income tax payers, a small (only 3% of Indians pay income tax) but influential section of the country's middle class.

Social security schemes are expected for unorganised workers

Although a few irritants for the private sector have been removed - taxes on fringe benefits and commodities transaction, for example - the country's corporate sector was expecting much more by way of bigger tax cuts. No wonder the stock markets plunged after the budget.

By and large, the finance minister has assumed that there will be little or no growth in the economy this fiscal year - he's expecting some 7% growth at the most. Hence, the government has decided to spend its way out of the slowdown.

The fact that Prime Minister Manmohan Singh is a renowned economist, has certainly helped the government devise strategies aimed at countering the slowdown that has seen the rate of growth of India's economy come down from a record 9% four years in succession to below 7% at present.

Until the 1970s, the ruling Congress party was perceived as a left-of-centre party espousing socialist rhetoric under the then Prime Minister Indira Gandhi.

In the early 1990s, the Indian government's economic policies became more market-friendly and outward looking.

'Inclusive development'

Mr Mukherjee holds the important post of finance minister because he represents the centrist space - in terms of economic and political ideology - within India's Grand Old Party as it lurched from the left (under Indira Gandhi) to the right (under Mr Singh as finance minister in PV Narasimha Rao's government).

The middle class received some modest tax concessions

Having won an election in April-May on a platform of a jobs guarantee programme in rural areas and a farm loan waiver scheme, the economic agenda of the Congress party appears to have again shifted discernibly left towards policies that ensure growth is "inclusive" by alleviating poverty and creating jobs.

The first Singh administration wrote off agricultural loans worth 700bn rupees (equivalent to $15bn at current exchange rates) and also initiated a legally guaranteed jobs-for-work programme for 100 days a year for rural families, both of which have apparently paid the Congress rich electoral dividends.

Immediately after becoming prime minister for the second time, Mr Singh said that among his main tasks was reviving the economy, creating jobs and ensuring that the benefits of growth reached the underprivileged.

Owing to the international recession, industrial production in India has declined and exports have fallen by a third.

Millions of jobs, especially in export-oriented industries such as textiles, garments, gems, jewellery, leather and handicrafts, have been lost in recent months as Western markets for such products have disappeared.

Whereas India is the second-fastest growing economy in the world among large countries after China, a substantial section of the country's 1.1 billion people is extremely poor - at least one out of four survives on less than $1 a day and more than two out of three Indians live on $2 a day.

Food security

High on the list of policy priorities of the government is the enactment of a new food security law that envisages providing 25kg of rice and wheat each month at a subsidised rate of three rupees (or six cents) a kilo to each poor family. This was one of the pre-election promises made by the Congress.

One in four Indians lives on less than $1 a day

Congress party chief Sonia Gandhi recently wrote to the prime minister urging him to enlarge the scope of the subsidised food programme to the urban poor, families headed by single mothers, artisans and those physically or mentally challenged.

The challenge for the Indian government is to meet the aspirations of the country's youthful and upwardly mobile middle classes while widening social safety nets for the poor.

The government's annual report card on the state of the economy raised expectations that controversial privatisation initiatives may be considered as well as changes in labour laws and policies on foreign direct investment in retail and insurance.

But these did not materialise in the budget proposals - proving once again that the government has opted for cautious continuity in these troubled times.

India’s Budget lacks a reform agenda

When Sonia Gandhi, India’s Congress Party president and leader of the ruling United Progressive Alliance government, praised the country’s 1969 bank nationalisation at a conference in Delhi last year, there were gasps of surprise and horror from businessmen in her audience.

Today, the same remark has been made by Pranab Mukherjee, the finance minister (right), in his Budget speech but, I have not heard any murmurs of horror from commentators on television programmes.

Maybe that is because this is what one should expect from the 73-year old minister who, I remember, gave me a distinctly frosty and uninspiring interview when I first arrived in India as the FT correspondent in 1983 and he was serving his first term as finance minister.

Mukherjee has no track record as an economic reformer, and today’s speech does nothing to show that he is one. But he is the government’s most able political tactician, so one would expect him to at least balance the politics, the books and the personalities, even if he couldn’t rise to the occasion with a reform agenda for India’s new government in the way that his predecessor, Palaniappan Chidambaram, would have done.

Mukherjee has done the politics by looking after farmers with loan concessions, plus more help for the rural poor and other social and infrastructure spending, and he has also handled the personalities (Sonia Gandhi, daughter-in-law of Indira Gandhi who nationalised the banks, was sitting next to him in parliament).

But he hasn’t balanced the books, which is probably why the stock markets have fallen sharply, and why no-one has so far found it very easy to say whether it was a really good or really bad budget. The government’s total expenditure has been increased by 36 percent (including defence by about the same proportion and highway building by 23 percent). And the central government’s forecast fiscal deficit (excluding the states’ individual deficits) is up substantially at 6.8 percent of gross domestic product, compared with 3.2 percent in 2007-08, because of measures taken to fend off the global economic crisis.

Both the 36 percent increase and 6.8 percent deficit are seen by many experts as too high, especially when there is no guide as to how Mukherjee expects to bring down the deficit, apart from aiming to get the country back to 9 percent economic growth from its current 6-7 percent. There has also been dismay that he is relying on government expenditure to boost the economy, rather than providing more of a stimulus for the private sector.

Mukherjee also said virtually nothing on divesting minority stakes in public sector companies, and only put a target of $240m on what might be raised by 2010. Here he was being sensible because I don’t think any Indian finance minister has ever reached his dis-investment target, and Mukherjee knows that it is a highly controversial programme and he might only be able to sell off 10 percent stakes in two or three corporations by the end of next year.

But it’s worth quoting what he said because it shows the basic strongly mixed-economy approach – not only his, but also that of Manmohan Singh, the prime minister who has never been a keen public sector reformer, and Sonia Gandhi, with her whose soft leftward-leaning liberalism. He said:

“The Public Sector Undertakings are the wealth of the nation, and part of this wealth should rest in the hands of the people. While retaining at least 51 percent Government equity in our enterprises, I propose to encourage people’s participation in our disinvestment programme. Here, I must state clearly that public sector enterprises such as banks and insurance companies will remain in the public sector and will be given all support, including capital infusion, to grow and remain competitive.”

And on Indira Gandhi’s bank nationalisation he said (ignoring the fact that Gandhi did it more for short-term political than long-term socio-economic reasons):

“Never before has Indira Gandhi’s bold decision to nationalise our banking system exactly 40 years ago – on 14th of July, 1969 – appeared as wise and visionary as it has over the past few months. Her approach continues to be our inspiration even as we introduce competition and new technology in this sector.“

The fault here of course is that he seemed to be closing the door on urgently need financial sector reform, and said nothing about the need to make public sector businesses more efficient, shedding surplus labour and management. Nor was there any discussion of the benefits (albeit very limited) of selling off public sector minority strakes – but that is par for the course because there is, as I have argued before, little real discussion of the pros and cons of policy in India.

One final omission – he said nothing on foreign direct investment (I have checked with a word search in the speech for those words and FDI), which might seem surprising. But it isn’t because the government’s FDI policy is in a mess, thanks to Mukherjee endorsing changes introduced before the election by Kamal Nath, then industry minister, but opposed by Chidambaram.

The contrast with the reforms rhetoric that characterized most Budget speeches in the last 18 years was marked. Far from laying out a roadmap for divestment or privatization, Mukherjee spoke proudly of Indira Gandhi’s “wise and visionary” nationalization of banks four decades ago, which he said had ensured that India’s banking system didn’t go down with the West's in the financial meltdown.

The sense of achievement with which he spoke of government expenditure crossing Rs 10 lakh crore for the first time ever must also have left the reformers wringing their hands in despair. Rather than sounding apologetic about burgeoning spending and a fiscal deficit that's touched 6.8% of GDP — a level not seen since the reforms began in 1991 — the FM was actually boasting about the fact.

There is also bound to be disappointment in the same circles about the fact that there wasn’t even a deadline set for returning to the path of fiscal chastity as defined by the Fiscal Responsibility and Budget Management Act (FRBM).

The reaction of the markets betrayed this sense of being let down, but many industry leaders told TOI that better sense would soon prevail. Big government, after all, is not such a bad thing for a corporate sector desperate for demand, a fact that is more clearly recognized in the aftermath of the global crisis than it was before. Spending your way out a slowdown is no longer considered profligate.

A sizeable chunk of the projected increase in spending was forced, since high borrowings last year have pushed interest payments up by almost Rs 33,000 crore. But the Budget also provided for sharp jumps in spending on defence (24%) and internal security (31%).

There are also significant increases in spending on infrastructure like power and roads as well as on the social sector — employment generation, health, education, rural development. In many cases, the increases are not quite as large as the FM made them sound in his speech if one compares the Budget outlays for the current year with revised estimates for last year rather than budget estimates, but that’s a minor sleight of hand that’s par for the course.

For someone whom Euromoney designated the world’s best finance minister in 1984, one more budget would be a cakewalk. And in a sense, Pranab Mukherjee could not have chosen a better year. The elections are over, and with them the need to spend lakhs of crores buying votes. According to his figures, the three stimulus packages of the past year cost 3.5 per cent of national income, and took the fiscal deficit to 6.5 per cent. Whilst national income rose 12 per cent in nominal terms, Central government expenditure rose 36 per cent. The share of citizens’ consumption in additional expenditure during the year was 27 per cent; government’s share was 32 per cent. And all that expenditure just disappeared into unknown pockets, leaving no trace.

But now, the elections are won, and the Opposition is prostrated. Mukherjee must have noticed that he was interrupted only once; it was late in his speech, by the Yadav pair, Mulayam and Lalu. The depleted ranks of the Bharatiya Janata Party listened to him in silence, as did his erstwhile friends, the Communists. With the political battles behind him, Mukherjee should have faced less importunate demands for political favours.

In another sense, however, it was a difficult year to make a budget for. Last year, Mukherjee’s predecessor, P. Chidambaram, had boasted of 12 uninterrupted quarters of over 8 per cent growth, and looked forward to ever higher growth in future. Mukherjee faced a fall in growth to 6.7 per cent last year and 5.8 per cent in the last two quarters. Being a good minister, he had to accept his economists’ word that the slump would be brief and that the economy would be roaring before the end of the year. But he could not ignore the fact that manufacturing growth has collapsed, and that imports and exports have fallen in absolute terms. He had to stimulate the economy. But with a bulging fiscal deficit, he could not continue to spend his way out of recession. In the past year, he had increased revenue expenditure by 35 per cent, and actually reduced capital expenditure. Being back in power for another five years with no political competition in sight, he did not need to continue to take such a short-sighted view.

He has promised to return to the path of rectitude — but not yet. He proposes to increase revenue expenditure by a quarter, whereas his revenue receipts are expected to go up only 9 per cent. He expects to raise fiscal deficit from 6.5 to 6.8 per cent of GDP. That is improvident. But most of the revenue expenditure is on interest, subsidies and defence. The budget abolishes the provision for special securities that the government issues to fertilizer companies, and reduces the provision for securities to oil marketing companies from Rs 75,000 to Rs 100,000 crore. So subsidy reductions seem to be in the offing. That is laudable. But in general, Mukherjee continues to walk in his disastrous predecessor’s footsteps, to pile on more debt and to fetter his successors’ freedom of manoeuvre. Every year we read the finance minister’s words and comment on his myriad little alterations. But we never count the cost of the short-sighted government of which he is a star performer. The budget could be a crucial source of finance for nation-building investments. It could be used to secure the country against the dangers arising from international financial instability. It could dismantle the complexities Chidambaram introduced and make taxpayers’ lives easy. It could give them relief in a difficult economic climate. Such are the opportunities missed once more this year.

While a major simplification must await another year, Mukherjee did correct some major mistakes of his predecessors. He abolished the fringe benefits tax, Chidambaram’s ill-conceived invention which introduced quite unnecessary complications into corporate managers’ lives. He also abolished Chidambaram’s 10 per cent surcharge on personal income tax, though for no reason he decided to continue with the surcharge on corporate profits. He got rid of the commodities transactions tax. These are all laudable measures. But perhaps the most radical change is to base corporate exemptions on investment rather than on profits. Profit-linked exemptions were available only to profitable companies, whereas it was often loss-making companies that needed relief most. Now, if they invest for the future, companies will earn exemptions.

However, confining exemptions to a few chosen industries will be seen as pork-barrel politics. For instance, inclusion of gas pipelines could be a favour to Reliance Industries, as also the extension of the tax exemption under Section 80-I(B)9 from oil to natural gas. The budget is replete with such changes, which reek of special favours — for instance, abolition of duty on unworked corals, or on just five additional items importable by sports goods manufacturers. Considerations of special favour have never deterred finance ministers from giving tax concessions. But they create demands for more concessions, and complicate the direct tax system at every step. They also give tax authorities fresh opportunities to contest classification of items, and create lucrative sources of bribes. Successive finance ministers have given so many concessions that even the revenue departments do not know how many there are. A future finance minister will, I hope, make a bonfire of them. It is not only concessions that are marketable; higher duties also earn fortunes. For instance, the finance minister has raised import duty on gold and silver; this will make smugglers happy. There was a time when Haji Dawood was their king; presumably, this concession is meant for some new beneficiaries, although he will not hesitate to exploit it.

The BJP governments brought down customs duties to extremely low levels; now there are many items that bear import duties of 5 to 15 per cent. Mukherjee has played around with many of them, reducing most by 2.5 per cent. These low duties may give a finance minister much room for political games. But they raise little revenue; their wholesale abolition would simplify their victims’ lives.

Generally speaking, government enterprises get favoured treatment from Congress finance ministers, being the treasured relics of its socialist past. So it was a pleasant surprise to see Mukherjee abolish a concession to Indian railways, and to make them subject to service tax. Lalu Prasad will think that this is the unjust reward the railways got because he made them profitable; but they can afford to pay the tax.

I have avoided comment on Mukherjee’s expenditure proposals because the pork-barrel politics that goes into them would be too monotonous to describe. But the monitoring and reporting systems set up for the national rural employment guarantee programme do create some assurance that the money spent is creating employment and accomplishing public works. The government has apparently decided to give the same money wage to NREG workers all over the country. That, in my view, is a mistake; the wage should be related to the local market wages. The government should aim to achieve full employment; but it should not raise market wages without thinking of the consequences for agricultural production and inflation. But overall, NREGP works well; I wish other programmes of the government were equally transparent.

Pranab Mukherjee hopes to dive out of the economic crisis by spending through his nose

OUR BUREAU

July 6: Pranab Mukherjee has stuck to the wisdom of spending one’s way out of the towering shadow of a worldwide economic downturn at the cost of putting the government deep in hock.

The finance minister abolished the 10 per cent income tax surcharge and raised the personal income-tax exemption limit by at least Rs 10,000, which should put some extra money in the pockets of consumers. This budget, however, has already become known for not what it has done but what it has not.

A hugely disappointed stock market that had pitched its expectations high hammered the sensex down by nearly 900 points. Some said it was the projected fiscal deficit, the gap between government expenditure and income, of 6.8 per cent of the GDP that unsettled it. Still others felt the market tanked also because of the minimum alternate tax, or MAT, which is levied on companies that pay too little income tax, being raised from 10 to 15 per cent.

Mukherjee said later: “I have taken the tremendous risk to create the fiscal space of having a higher deficit. I could have gone for the more conservative way of reducing the deficit and satisfied myself with six or less than that percentage of growth.”

In other words, the government expects growth to continue to be depressed and, therefore, the expenditure splurge.

The numbers tell the story: four months ago in the interim budget, Mukherjee had forecast a GDP growth of 7 per cent for 2009-10. In the budget, he has dragged the projection down to 6.5 per cent in spite of flourishing “green-shoot” theories.

Mukherjee set a target of 9 per cent growth but was cautious on when this would be reached. “It may not be in the next financial year, but my target is to reach there as fast as possible, at least 8.6 per cent if not 9 per cent,” he said.

Caution also marked the programme of divestment of government holding from public sector companies. He did not even mention the word in the budget but the divestment estimate provided in the papers named a conservative estimate of Rs 1,120 crore.

It was left to finance secretary Ashok Chawla to announce that divestment would kick off with Oil India and the NHPC. The market had, however, already taken note of the lack of clarity in the budget on divestment and made mincemeat of Mukherjee.

The wholesome figure of over Rs 10,00,000 crore he served up as the government’s projected expenditure for the year did not impress it. The market took little notice of the abolition of the much-maligned fringe benefit tax and the commodities transaction tax.

The Opposition was dismissive. “The budget has proved to be a damp squib,” said BJP president Rajnath Singh.

Whatever its private views, industry expressed its opinion in words the government would like. The Confederation of Indian Industry said: “The budget’s spending package for inclusive growth and large outlays for infrastructure and NREGS (the job scheme) will revive the economy.”

Just as reform was the mantra for solving all the world’s ills for the 15 years since liberalisation began, inclusive growth is the post-2004 shibboleth.

The government will spend 144 per cent more than it did in 2008-09 on the national employment scheme and an additional 45 per cent on Bharat Nirman, or rural infrastructure. For urban infrastructure development, the allocation has been raised by 87 per cent.

Mukherjee hopes that all these crores will deliver another percentage point or two of GDP growth and take care of deficit worries by generating extra revenue. If they don’t, the ghost would have spooked us all.

Capital Account | Manas Chakravarty

The problem with Pranab Mukherjee’s Budget speech lay not so much in what he said but in what he did not say. The markets expected him to seize the opportunity occasioned by the government’s decisive election win to lay down its policy agenda for the next five years. But Mukherjee did nothing of the sort, behaving instead like a finance minister haunted by the emaciated spectre of what remains of the Left. In a speech notably devoid of vision, he said nothing about reform, nothing about encouraging foreign investment, nothing about getting the fiscal deficit back to a respectable number and very little about disinvestment. Little wonder the markets were disappointed.

Nevertheless, one of the things the markets wanted was higher spending, something that the finance minister has definitely delivered. The fiscal deficit has been targeted at 6.8% of the gross domestic product (GDP), compared with 6% in the FY09 revised estimates. Total expenditure is estimated to be 7% more than in the interim budget, or 13% more than the FY09 revised estimates. Plan expenditure is up 15% compared with last year. Budgeted capital expenditure is up a good 26.8%, although part of that is capital expenditure on defence. If we exclude that, capital expenditure (both Plan and non-Plan) is higher by 21.7%. That’s a big improvement from the contraction in capital expenditure we had in FY09 and it should be a positive for capital goods companies. The slowdown in the economy has been primarily the result of lower investment demand and the private sector can hardly be expected to go in for capital expenditure given the substantial excess capacity that exists globally. So it was up to the government to help out and it has done so in ample measure.

Revenue expenditure is budgeted to rise by 11.7% and this will add to consumption demand. The substantially larger outlay for the National Rural Employment Guarantee Scheme will, in particular, boost rural demand. In short, the government is continuing with its policy of providing a fiscal boost to the economy to tide over the slowdown, despite the rise in the fiscal deficit.

On the receipts side, the impact of the slowdown is clearly visible. In FY09, tax revenues were up a mere 6%. But in FY10, the increase in tax revenues has been pegged at just 2%.

That raises the question of what kind of growth is expected. Interestingly, the estimate of nominal growth has actually been revised down from 10.97% in the interim budget to 10.05%. Given an average inflation rate of around 3%, real GDP growth is expected to be around 7% in FY10. In FY09, while GDP growth was 6.7%, the inflation rate was much higher and, therefore, tax receipts were more buoyant.

The big question, of course, is whether the rise in fiscal deficit will push up interest rates. The net borrowing number now stands at Rs3.98 trillion, compared with Rs3.08 trillion in the interim budget and Rs2.62 trillion in FY09. The bond markets were expecting a much lower number, which is why yields went up immediately after the Budget. At present, though, there’s still plenty of liquidity in the market and financing the deficit should not be difficult. If needed, the Reserve Bank of India can always go in for open market operations to inject liquidity. In fact, banks have been reducing both deposit and lending rates recently. But it’s when credit starts picking up that the pressure on interest rates will increase. As mentioned earlier, however, the nominal GDP growth target has been revised downwards, which seems to indicate that the government does not see credit growth going up by much this year. Keeping the fiscal deficit high is, therefore, a gamble they have taken.

If growth is higher, it could lead to higher tax receipts. It’s also likely that proceeds from disinvestments will lead to more revenues, thus reducing the deficit. And the government has said that it will be in a position to lay down a road map for reducing the deficit after the Thirteenth Finance Commission submits its recommendations in October. In sum, the disappointment is the result of the very high, some would say unrealistic, hopes placed on the Budget. What this also means is that the door is now open for positive surprises.

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